Tag Archives: Offshore Voluntary Disclosure

The IRS recently released a procedural update to the Internal Revenue Manual for the Streamlined Filing Compliance Initiative. The IRS added section 21.8.1.27 to the Internal Revenue Manual including two subsections detailing Streamlined Filing Compliance for U.S. Taxpayers Residing Outside the United States (IRM 21.8.1.27.1) and Streamlined Filing Compliance for U.S. Taxpayers Residing in the United States (IRM 21.8.1.27.2). The new subsections detail eligibility requirements for taxpayers entering into the Streamlined Filing Compliance Initiative to avoid failure-to-file and failure-to-pay penalties when filing amended tax returns.

IRM 21.8.1.27.1(5) and IRM 21.8.1.27.2(4) give detailed instructions for U.S. taxpayers seeking relief for failure to elect deferral of income from certain retirement and savings plans where deferral is permitted by an applicable treaty.

IRM 21.8.1.27.2.1 gives detailed instructions for IRS Accounts Management to process the Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures that is required for domestic streamlined filers. IRM 21.8.1.27.2.1(9)(6) also instructs the Accounts Manager to refer any case with five or more foreign information returns (Forms 3520, 3520-A, 5471, 5472, 8938, 926, or 8621) to LB&I OVDP Compliance. The five information return threshold is a combination of all years filed. For example, submissions containing three Forms 5471 for 2011 and three Forms 5471 for 2012 would be referred since the total number of forms submitted is six.

The IRS recently revised and updated the 2012 Offshore Voluntary Disclosure Program. The modified program takes effect on July 1, 2014 and provides streamlined procedures and reduced penalties for U.S. taxpayers with foreign bank accounts.

The new streamlined procedures are available to U.S. taxpayers residing both inside and outside the United States whose failure to disclose offshore assets was non-willful. The new procedures create an opportunity to disclose unreported accounts under terms (especially reduced penalties) that were not otherwise available under the existing 2012 Offshore Voluntary Disclosure Program.

The new procedures also provide transition opportunities for certain taxpayers enrolled in the current OVDP program (but who have not yet entered into a closing agreement) and others who have made quiet disclosures.

On September 1, the IRS unveiled the details of a new program to encourage more offshore account holders to file U.S. income tax returns and the associated Reports of Foreign Bank and Financial Accounts (FBAR). This program is a departure from the current Offshore Voluntary Disclosure Program and its predecessors in at least one significant aspect – there are no mandatory penalties.

Taxpayers must meet a number of qualifications to take advantage of the initiative and avoid penalties. The new procedure is limited to non-residents subject to U.S. filing requirements who have not been filing U.S. income tax returns. Dual citizens meeting the non-resident, non-filing requirements also may participate. Qualifying taxpayers must have lived abroad since January 1, 2009 and not filed a U.S. tax return in that time.

Eligible taxpayers also must present a low level of compliance risk. All applications will be reviewed and the IRS will determine whether the taxpayer presents a low compliance risk. The determination will be made on the basis of returns filed under the procedure and a two-page questionnaire that each applicant must complete. High risk factors include material economic activity in the United States, ongoing IRS investigation or audit, and previously assessed FBAR penalties.

Applications will be processed in a streamlined manner if no high risk factors are present and the returns show tax due of less than $1,500 per year. The low tax liability may be within reach for many non-resident taxpayers if they are eligible for the foreign earned income and foreign housing cost exclusions under IRC Section 911.

Two important notes for taxpayers who may be considering this program. First, participation in the program does not provide protection from criminal prosecution. Second, once a taxpayer files a submission with this procedure they will no longer be eligible to participate in the Offshore Voluntary Disclosure Program (OVDP). Taxpayers interested in this program should contact a well-qualified tax professional to discuss their facts and the details of this program.

The IRS seems to have taken a nod from the legendary Yankee backstop, Yogi Berra, because “it’s déjà vu all over again.”

On January 9, 2012, the IRS announced that it was “reopening” the Offshore Voluntary Disclosure Program (OVDP) for an indefinite period. This is the latest incarnation of foreign bank account disclosure initiatives undertaken by the IRS. Prior programs included the 2003 Offshore Voluntary Compliance Initiative (OVCI), the 2009 Offshore Voluntary Disclosure Program (OVDP), and the recently closed 2011 Offshore Voluntary Disclosure Initiative (OVDI). The IRS seems to have adopted the name of the 2009 program, i.e., OVDP, for this current initiative.

The current program will track many of the requirements of the 2011 OVDI program but with some important, if still undefined, differences. First, the current OVDP will be open for an indefinite period. The IRS does note, however, that it may announce a closing date at any time in the future. There is no deadline for filing a disclosure under the current program but again the IRS notes that it could change the terms of the program at any time. The IRS announcement for the new program also specifically suggests that it may increase penalties for all or some taxpayers, or certain defined classes of taxpayers. The IRS promises additional guidance on the new program within the next month and another update to the frequently asked questions (FAQs) published under the 2011 OVDI program.

One known change from the 2011 OVDI program is that penalties for taxpayers in the highest penalty bracket will be increased to 27.5% under the new program. The disclosure penalty rates for volunteers holding fewer assets in foreign account will remain at 5% and 12.5%, at least for the time being. Volunteers still must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. Volunteers who feel the penalty is disproportionate may still opt for an examination upon filing.

The current disclosure program, like its predecessors, is directed at U.S. taxpayers who hold interests in offshore or foreign bank accounts. U.S. taxpayers include U.S. citizens, dual citizens, permanent residents, and non-U.S. citizens who may be “substantially present” in the U.S. for tax purposes. The initiative tracks the annual requirement to file Foreign Bank Account Report (FBAR), Form TD F 90-22.1. The initiative covers any bank, securities, mutual fund or other financial instrument accounts held with a financial institution. It does not include individual bond holdings or stock certificates.

Finally, the press release notes the recognition by the IRS that dual citizens and others may be delinquent in meeting the FBAR filing requirements but still owe no U.S. tax. This long overdue recognition is accompanied by a promise that the IRS is developing procedures to allow these taxpayers to come into compliance with the law.

On Friday, in anticipation of the impact of Hurricane Irene, the IRS announced that it would extend the deadline for offshore voluntary disclosure initiative (OVDI) requests from August 31, 2011 until September 9, 2011. Taxpayers considering the OVDI program and who wish to take advantage of the extended due date for filing should take note that they are required to send two separate requests to two different IRS offices as noted below.

[Update 8/29/11] - The IRS clarifies that the September 9, 2011 extension also applies to taxpayers filing FBARs pursuant to FAQs 17 and 18.

Taxpayers with undisclosed offshore accounts who have yet to submit a request to participate in the program (and the necessary supporting documentation) now have until September 9, 2011 to:

Send identifying information to the Criminal Investigation office. The required identifying information is name, address, date of birth, and social security number. Voluntary filers are also asked to send as much of the other information requested in the Offshore Voluntary Disclosures Letter as possible. Requirements of the OVDI Letter can be found here. This information must be sent to:

Send a request for a 90-day extension for submitting the complete voluntary disclosure package of information to the Austin campus. Information about the complete OVDI disclosure packet can be found here. This request must be sent to: